I recently mentioned how the IMF and the World Bank had begun to talk about inequality, part of a growing recognition that too much inequality is bad for society and the economy. To the list we can now add the OECD, who released a striking new report this week.
Noting that in-country inequality has risen in 16 out of 21 member states studied, the OECD has chosen to look specifically at the links between inequality and economic growth. “Reducing income inequality would boost economic growth” they assert. “This work finds that countries where income inequality is decreasing grow faster than those with rising inequality.”
Contrary to the regular arguments against action on inequality, their research found “no evidence that redistributive policies, such as taxes and social benefits, harm economic growth, provided these policies are well designed, targeted and implemented.”
This will not be a surprise to those who have been campaigning for a more equal society. (Neither is it a surprise them that among the many benefits of equality, it’s the connection to economic growth that has got the OECD on board.) But there are some nuances to the research that campaigners will want to consider carefully, as it’s got its own angle. Specifically, much of the writing on inequality focuses on the runaway gains to the richest in society, the now infamous 1%. While this aspect of inequality matters for other reasons, the bit that impacts economic growth most is the gap between the middle and the bottom.
The reason that inequality holds back economic growth is to do with education and social mobility, the report argues. Higher inequality lowers educational opportunities for those on the lowest 40% of incomes. If your parents are on a low income, you have a much lower chance of going to university and completing a degree, and thus fewer opportunities for well-paid employment.
Working across generations, the impact of inequality is cumulative. The OECD have calculated how much more growth countries could have had if they had been more equal. The results should give pause for thought, especially when you look at Mexico on the far right below. Did rising inequality basically eat two decades of Mexico’s economic growth?
The OECD have shown how reducing inequality could lead to higher economic growth. That’s one of many reasons why inequality matters, and from a postgrowth perspective certainly not the most important, but in our growth-obsessed economy it may be a trump card. Just as it was Lord Stern and his economics that put climate change on the political agenda, perhaps it is the economics of inequality that will finally capture our politicians’ attention.